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Friday, 13 January 2012

Risk Pooling

Risk Pooling is linking the uncertainty of individuals into a calculable risk for large groups.

Let us try to understand it with an example: There could be chances of widespread dengue fever in Pune during monsoons. As per the health department estimates, out of every 1,00,000 people in the Hinjewadi area of Pune, only 1,000 may contact dengue.

The health department has following information:

  • An event but which might occur in future – Dengue
  • Population size which can get affected – 1,00,000
  • Calculable risk – 1000 (1% of population)
  • Legal risk

This information can help us in making a risk pool. Assume the cost to be Rs 500 per illness, then insurance company can insure 1,00,000 members of the group against the Dengue fever, (500* 1000 = Rs 500,000/total population) or you can say Rs 5 per person. By agreeing to pay the cost of each sick person in exchange of the Rs 5 payment (Premium), the insurance company has effectively pooled the risk of the group.

In other words, a risk pool is one of the forms of risk management mostly practiced by insurance companies. Under this system, insurance companies also come together to form a pool, which can provide protection to insurance companies against catastrophic risks such as floods, earthquakes etc. The term is also used to describe the pooling of similar risks that underlies the concept of insurance. While risk pooling is necessary for insurance to work, not all risks can be effectively pooled. In particular, it is difficult to pool dissimilar risks in a voluntary insurance market, unless there is a subsidy available to encourage participation.

In US, health insurance risk pools are special programs created by state legislatures to provide a safety net for the "medically uninsurable" population. These are people who have been denied health insurance coverage because of a pre-existing health condition, or who can only access private coverage that is restricted or has extremely high rates. 

Do write to me if you wish to discuss other cases of Risk Pooling.

Ruchi Agarwal
ruchi.agarwal (at) 

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